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The Changing Solar Paradigm

The solar industry started recovering in late 2012 due to improvements in demand, but this was not the only factor that resulted in this demand-supply balance. Anti-dumping legislation from both the US and the EU capped the prices charged by Chinese manufacturers. Moreover, China also banned the construction of new factories in order to keep supply in check.

All in all, the improvement in demand resulted from government intervention. The solar industry has been recovering since then and growth is anticipated in the future. The US is conducting another round of anti-dumping activities as it is becoming more and more difficult for US players to compete with commodity solar manufacturers. On the other hand, the European Union has recently cut tariffs from $0.77/watt to $0.73/ watt. However, recently a consortium of EU solar manufacturers have blamed Chinese firms of violating the agreement and selling below the price floor.

The trade warsThere have been trade tensions between the US and China for some time now. Certain Chinese individuals faced hacking allegations and now the US has imposed anti-dumping duties on Chinese solar manufacturers. The Department of Commerce imposed duties on Chinese players, citing Chinese government subsidies and the fact that Chinese companies are sidestepping the current duties by shifting their cell production to Taiwan. This ruling came in response to a petition filed by the US arm of German solar manufacturer SolarWorld AG. It imposed the duties on:

Parts assembled in China from Taiwanese output

Parts assembled in Taiwan from Chinese output

The Department of Commerce took this step to plug a loophole as the Chinese manufacturers were using Taiwanese bases to flood the US with cheap solar parts. It imposed the following duties:

The impact on the Chinese industryChina is the largest PV module supplier and the host to well-known players like Yingli Green Energy (NYSE: YGE) and Trina Solar. This extended duty by the US will affect the competitiveness of Chinese modules in US markets and, as a result, their share prices are expected to decrease. Chinese companies which employed the Taiwan loophole held 42% of the US market. Another report mentioned that Chinese panels accounted for 49% of all panels deployed in the US. However, note that shipments to the US only made up around 10% of the total shipments last year. Therefore, this will not have a massive impact on the Chinese industry. However, it will hit some of the players harder than others.

Shipments to the US made up around 20% of Yingli Solar's shipments in 2013 as it supplied approximately 660 MW to the market.

Source: Yingli

Shipments to the US made up around 17% of Trina Solar's shipments as it supplied approximately 440 MW to the market. The company expects to send 20% of its total shipments to the US in 2014.

Source: Yingli

Trina will maintain, or even surpass, the target it originally set. This is because the Department of Commerce imposed a lower duty on Trina than it did on other players. If we factor the 19% duty into the current price that Trina charges for panels, the new price comes in at around $0.70-$0.75/watt. This is on par with non-Chinese manufacturers.

Given the US' capacity limitation, some share of PV panels has to come from China, and this will probably result in the diversion of business toward Trina Solar amid high duties imposed on other players such as Yingli. Furthermore, Trina has more efficient products. The point is that even though the total Chinese share of the US market may come down, Trina will benefit as the US solar business is expected to converge toward the company.

Impact on the US industry and its playersThe recent imposition of duty tariffs will also affect the US industry. First and foremost, Chinese panels will lose their competitive advantage as their prices will reach par with non-Chinese manufacturers. Moreover, supply will also come under pressure as businesses will be reluctant to deploy expensive Chinese commodity cells, and their prices are expected to rise further as a result.

IHS, however, believes that there is no danger of a PV shortage as a result of these tariffs because non-Chinese silicon PV capacity sits at around 11.2 GW, along with 6.5 GW of thin film capacity. The U.S. is expected to install around 6.5 GW in 2014 and, hence, no PV shortage will occur. Will non-Chinese manufacturers be able to offer PV modules at costs below those of Chinese panels?

If not, demand and growth will be hampered in the near future and prices are likely to remain on the high side. The supply constraint and price increases are good news for First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) . First Solar's thin film CdTe demand will increase, and SunPower will be able to offer differentiated products at prices comparable with those of commodity modules. SolarCity (NASDAQ: SCTY) , on the other hand, is facing a difficult situation. As the company mostly uses Yingli modules, higher module prices will decrease its margins. It faces a serious threat from SunPower in the rooftop market if it doesn't compromise on margins.

The bottom linePrices for solar modules will go up, and this will result in a slowdown in the US solar market. Another major concern for the U.S solar industry is the upcoming expected reduction in solar Federal Income Tax credit from 30% to 10% in 2016. This could have a serious impact of financial viability of solar solutions for U.S. customers.

The Chinese Solar industry will feel the backlash of any anti-dumping moves by the U.S. government. Trina Solar, First Solar, and SunPower will be the beneficiaries of this round of anti-dumping impositions.

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